Financial hegemony suffered its first major blow in the 2008 crisis. This crisis, fuelled by the over-indebtedness of low-income borrowers in the US, revealed that financial assets were bubbles that had nothing to do with real wealth.
Throughout the Great Depression, the euro crisis and the Covid-19 pandemic, the authorities have always talked about “financial stability”. In 2020 and 2021, for example, to prevent the effects of the lockdown from leading to an economic collapse, the European Central Bank almost doubled its balance sheet, providing liquidity and buying €4 trillion worth of securities: That was about a third of the eurozone’s income, or €12,000 per person.
Today, there are more important concerns than market volatility. And it may be time to say goodbye to financialisation for good.
Economist Ann Pettifor of the Progressive Economy Forum and the Political Economy Research Centre at Goldsmith’s College answered our questions. Pettifor, whose work focuses on the global financial system and sustainable development, and who is known for her accurate prediction of the 2008 financial crisis, says she has “no doubt that there will be another crisis on a larger scale than 2008”.
Why are mainstream economists’ explanations for the causes of the housing crisis flawed? In September 2023, you wrote an insightful blog post about the reverse effect of debt deflation after a period of debt inflation. Why do you think rents are rising at record rates? It is a serious problem in Turkey, as it is in the UK and Ireland.
The flaw in mainstream economics is the over-emphasis on the concept of supply and demand; and the exclusion of the role of excessive, globalized and mobile capital flows in inflating house prices, and housing markets in virtually every country in the world (including poor countries like Ghana, where house prices in Accra have rocketed).
And there has been a steady decline in the prices of assets, goods and services in China. In one of your articles you wrote: “We’re in for ‘higher for longer’ interest rates; another deflationary era … and more crashing asset markets”. What are the risks of China’s deflation for the rest of the world?
Assets act as collateral against borrowing. When interest rates rise, borrowing (debt) becomes less affordable. That means that borrowers that have taken out a mortgage (borrowed) and then bought property (or any other asset) to rent out, make lower returns on the rent. In other words, a higher proportion of their income from rents has to go to repaying the rising cost of debt. When the cost of debt makes renting unprofitable, they sell the asset, in order to pay down the debt. Hence the shortage of rented properties in London.
If private equity firms for example, have borrowed money to buy up a water company (like the UK’s Thames Water) — then they too suffer from higher rates of interest slashing the rental profits from the water company. And so, they either go bust, or sell the company (asset) to pay down the debt.
The sale of assets begins to cascade prices downward… If the owner of London properties does not sell quickly, she will get caught up in the fact that many others are selling, and that therefore the prices of properties (assets) will fall…
So higher rates lead to the deflation of asset prices.
To keep its economy churning, and to keep jobs and incomes at a level expected by the Chinese people, China has oriented its economy towards exports. Exports create jobs and are very profitable for the big exporting corporations. But its export-orientation is also a consequence of its inequality. Chinese workers are paid too little to be able to consume all that China produces. The same applies to Germany where wages have been repressed in real terms. German workers can’t consume all that is produced in Germany. The excess is sold (dumped) on to global markets.
The problem is that demand (consumption) is low in the countries China is trying to sell into, also because of low wages and austerity essentially. When external demand is insufficient to absorb excess production, prices fall, and are the channel through which China (and other surplus countries like Germany) exports its deflation to the rest of the world.
Belief in the Bank of England’s ability to control inflation has begun to crumble, why do you think Britain has struggled to control inflation?
Because Britain’s inflation has not been caused by action (including wage rises) at home — as the governor of the Bank of England wrongly asserted. Britain’s inflation – just like inflation the world over- was caused by a) supply bottlenecks post-pandemic (think of the blockages in ports post-pandemic, the invasion of Ukraine and the subsequent disruption to energy and grain flows etc). b) inflation is worsened by speculation by the holders of huge financial assets (think pension funds, asset management funds (Blackrock, Blackstone etc); private equity firms and oil traders). Speculation takes place in global markets for commodities – not in British markets. The prices of oil and gas, of grains and other commodities are settled not in countries, but e.g. at Chicago’s Mercantile Exchange, or London’s Metals Exchange, where speculators use futures and derivatives contracts to bet on movements in prices. The ‘wall of money’ aimed at finite supplies of assets (oil, gas, copper, grains) can and has inflated the price of these assets. The Bank of England does not choose to regulate such speculation, and ignores the role of global markets in fueling Britain’s inflation.
Do you agree with the view that we are facing a second 2008 crisis? The most important political event of the 21st century so far remains the Great Recession, which triggered the populist uprisings and the collapse of neoliberalism that have characterized our recent history.
I have no doubt that there will be another crisis, on a bigger scale than 2008. That will be because there was not substantial change made to the globalized financial system as a result of that crisis. Furthermore, Wall Street banks and other financial institutions that could go bust before 2007-9 – no longer face that threat. They are all now ‘too big to fail’ and ‘too big to jail’. Furthermore, they have the backing of the mighty Federal Reserve – and therefore can take greater risks with speculation than before the GFC. In other words, they now look more like Soviet-style banks, than American capitalist banks.
The other reason that we are bound to have a global financial crisis, can be found in the system’s imbalances. Global financial assets (assets, debts and liabilities) according to the Financial Stability Board are in the region of $213 trillion dollars. Global real income, (GDP) is less than 100 trillion dollars. Imbalances in trade – i.e. between countries in surplus and countries in deficit – are leading to trade wars. Trade wars threaten global political, social and economic instability.
I worry most about pension funds, caught up in the speculative frenzy of the globalized financial system. If pension funds were to fail, the social and political impacts would be profound.
